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Is a housing crash imminent in China? China bears would think so. Home prices in major Chinese cities like Beijing and Shanghai are slipping, and transactions are taking a nosedive. The real estate market has entered what is arguably the deepest correction since the 2008 financial crisis, causing fears of a hard landing that might also drag down the entire Chinese economy.

So how much trouble is the real estate market actually in? According to the China Index Academy, an independent property research organization owned by real estate portal SouFun, housing prices in the 100 cities it monitors dropped 0.5% in June from the previous month, greater than the 0.32% month-on-month decline recorded in May (the first price downturn in 23 months).

The skyline of Shanghai, China. (Photo credit: Wikipedia)

But falling prices is not the most alarming signal, at least not yet (compared with the same period last year, prices were still higher in most major cities). It’s the distinct drop in transaction volume that is making economists nervous. As per SouFun’s data, transactions across major cities fell 19% year-on-year in the first six months of 2014, while new home transactions in Beijing and Shanghai fell drastically by 48.6% and 32.8% respectively, according to other research firms.

Liu, like many other experts, predicts that the downward trend will continue throughout the year. But the million-dollar question is how soon will things change? Will developers, whose inventory levels are near a four-year high, lower prices to sell out? Or will authorities in Beijing, who haven’t resorted to any major stimulus measures yet, finally decide to engage?

To answer these questions, it’s important to understand why the current downturn is different from previous ones. There were two major market corrections in the past six years: the first came during the financial crisis, when the average home price in 70 major Chinese cities took a blow, which then caused negative annual growth rates in the final months of 2008, according to China’s Office for National Statistics. But the downtrend didn’t last very long—prices picked up quickly in a few months and kept climbing steadily; by the spring of 2010, the growth rate was finally above 10%.

“The government exerted so much effort to rescue the market,” says Liu. “People believed that the government can drag the economy out of the huge [impact] of the financial crisis.” Beijing’s unprecedented RMB 4 trillion economic stimulus and, as a result, the expectation that prices would continue rising, carried the market through the first crisis.

The second correction happened in early 2011, when the impact of cash injections started cooling off. Capped by widely implemented home purchase restrictions, the annual growth rate of housing prices slowed and finally sank below zero again in early 2012.

The current correction is nothing like the previous ones, Liu argues, because the market, rather than the government, is the main driver. Even though Beijing’s effort to curb shadow banking may have helped trigger the downfall, Liu says that the root cause lies in the slowing Chinese economy.

“That has a big [impact on] people’s psychology in terms of their expectations about the future performance of housing prices,” he says, explaining why the demand for housing appears to be shrinking.

And this time the central government has largely stayed hands-off. Despite some small-scale stimulus packages, Beijing has not issued universal policy changes that will greatly impact the housing sector.

“We are of the consensus that the old Chinese economic structure has to be changed,” says Liu. “As a result, we are not going to see a large (government) bailout as last time.”

And when the demand stagnates, sellers can get creative. In Hangzhou and Wenzhou, developers are offering home buybacks at as much as 140% of the original selling prices, giving buyers an option to cash out in five years; in Hefei and other cities, developers will hand out “decoration funds” that are as high as RMB 76,000 (about $12,258).

“The developers are trying to come up with a scheme, like ‘shadow discounting’,” says Liu, who points to his personal interactions with developers. “It’s in their best interest to cut prices.”